Our Perspective
We now have 2nd quarter earnings results for the majority of companies in the S&P 500. The key question we ask ourselves this month is: whether the cracks we saw in corporate America and profit margins at the end of 2022 and in Q1 this year are on the mend, or whether deteriorating credit conditions are a sign of worse to come?
In aggregate, earnings per share (EPS) for companies in the S&P 500 fell for a third straight quarter, finishing down -4.1%. However, this was better than the -7% expected at the start of the reporting season. More importantly, the market’s expectations for earnings in the third quarter and indeed for 2023 as a whole, are now positive, pointing to a robust recovery in US corporate profits. Certainly, this quarter is the first in 2 years where analysts are raising their quarterly earnings expectations for the S&P 500 into positive territory.
Whilst the relatively strong quarter was driven by companies with a greater focus on the US consumer and a handful of technology companies, looking under the bonnet it’s clear that the aggregate results hide the pressure on companies in more cyclical sectors, the declines in manufacturing and difficulties to refinance debt. At the end of August, the US equity market is up almost 20% in 2023, with the price of the S&P 500 a mere 5% below its all-time at the end of 2021.
The reality is that the consequences of higher interest rates and tighter credit conditions are only now starting to show up. The probability of a rising default cycle, financial contagion, and a deteriorating labour market are definitely not reflected in valuations. Selectively, opportunities in the US market, and globally, definitely exist. But now is the time to be selective, embrace active management, and consider increasing that dry powder that is giving you a 5% plus risk free return!
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